In what type of strategy has the investor engaged?

05 / 03 / 2018 Assignment

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An investor owns a share of 3M (originally purchased at \$55) and writes a call option
on the same stock and sells it for \$3.00 with an exercise price of \$55.

a. In what type of strategy has the investor engaged?

This strategy is known as "Covered Call", when investor write a call on an
asset together with buying the asset.
b.Construct a table showing the profit (loss) to the investor assuming the following stock
prices when the call option expires: \$30, 35, 40, 45, 50, 55, 60, 65, 70. (Note you must
consider both the profit (loss) on the 3M stock and the option.)

exercise
selling cost

\$55.00
\$3.00

Stock Price
profit

\$30.00
\$(22.00)

\$35.00
\$(17.00)

\$40.00
\$(12.00)

\$45.00
\$(7.00)

\$50.00
\$(2.00)

\$55.00
\$3.00

\$60.00
\$3.00

\$65.00
\$3.00

\$70.00
\$3.00

c. Now assume instead of writing a call option, the investor bought a put option at th+A47e
same price. What type of strategy is this?

Protective Put strategy that aim to guarantee minimum proceeds equal to the put’s
exercise price.

d. Given (c) above, construct a table showing the investors profit (loss) assuming the
following stock prices when the put option expires: \$30, 35, 40, 45, 50, 55, 60, 65, 70.
(Note you must consider both the profit (loss) on the 3M stock and the option.)

exercise
selling cost

\$55.00
\$3.00

Stock Price
profit

\$30.00
\$(3.00)

\$35.00
\$(3.00)

\$40.00
\$(3.00)

\$45.00
\$(3.00)

\$50.00
\$(3.00)

\$55.00
\$(3.00)

\$60.00
\$2.00

\$65.00
\$7.00

\$70.00
\$12.00

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